BIR Ruling No. 313-15

September 15, 2015 BIR RULING NO. 313-15 Sections 27 (C) & 32 (B) (7) (b) NIRC; BIR Ruling No. 038-02 Subic Bay Metropolitan Authority Building 229 Waterfront Road Subic Bay Freeport Zone Attention: Roberto V. Garcia Chairman and Administrator Gentlemen : This refers to your letter dated July 10, 2013 requesting confirmatory ruling on the tax exemption of the Subic Bay Metropolitan Authority (SBMA) from all national and local taxes, including the 5% tax on gross income imposed on business enterprises doing business within the Subic Special Economic Zone ("Ecozone") pursuant to Republic Act (RA) No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992," as amended by RA 9400. Background: The Bases Conversion and Development Authority ("BCDA") was created under RA 7227 for the purpose of, among others, administering the former military reservations, such as Clark and Subic, into other productive uses to promote the economic and social development of the country. Pursuant to RA 7227, SBMA was established as an operating and implementing arm of the BCDA and has been tasked to undertake and regulate the establishment, operation and maintenance of utilities, other services and infrastructure in the Subic Special Economic Zone ("Ecozone'') including shipping and related businesses therein. Section 12 of RA 7227, as amended by RA 9400, provides for the tax treatment of business establishments within the Ecozone, to wit: "SEC. 12. Subic Special Economic Zone . . . . "(a) . . . "(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines; "(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to the National Government, and two (2%) percent to the Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units affected by the declaration of and contiguous to the zone, . . . ." Based on the above-quoted provisions, it is argued that no national or local taxes may be imposed on the revenues of SBMA as it is located within the Ecozone. It is further claimed that neither the five percent (5%) tax being imposed on the gross income earned by business establishments within the Ecozone can be imposed on SBMA since it is a government instrumentality and is not engaged in business. In reply, please be informed that nowhere can we find a specific provision in RA 7227 which expressly exempts SBMA from the payment of national taxes. If the Congress intended to exempt SBMA from the payment of taxes, it could have done so in the most clear and unequivocal terms just like in the case of the Tourism Infrastructure & Enterprise Zone Authority ("TIEZA") which, by virtue of Section 74 of RA 9593, has been made exempt from the payment of corporate income tax, to wit: "SECTION 74. Exemption from Payment of Corporate Income Tax . Notwithstanding any provision of existing laws, decrees, executive orders to the contrary, the TIEZA shall be exempt from the payment of corporate income tax, as provided under the NIRC." On the other hand, the applicable provision on the taxability of a government instrumentality is found in Section 27 (C) of the 1997 Tax Code, as amended, which provides, to wit: "SECTION 27. Rates of Income Tax on Domestic Corporations . xxx xxx xxx (C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities . The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government , except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC) and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity ." AcICHD The above provision which imposes tax on taxable income derived by government owned and controlled corporations, agencies and instrumentalities, except the GSIS, SSS, PHIC and PCSO, applies to SBMA in the absence of any statutory provision expressly granting tax exemption to SBMA. It cannot be overemphasized that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. It cannot be deduced by mere implication. Thus, he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake ( City of Iloilo, et al. vs. Smart Communications, Inc. , G.R. No. 167260 , dated February 27, 2009). It is worthy to note that the cases invoked by SBMA, to wit: 1) Republic of the Philippines vs. City of Paraaque , G.R. No. 191109, July 18, 2012; and 2) Manila International Airport Authority vs. Court of Appeals , G.R. No. 155650, July 20, 2006, to support its claim for tax exemption do not apply in the instant controversy since the issue discussed therein is whether or not the local government units (LGUs) may impose local taxes on a government instrumentality, which issue was answered by the Supreme Court in the negative by reason of Sections 234 (a) and 133 (o) of the Local Government Code of the Philippines ("LGC") to wit: "SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. xxx xxx xxx SEC. 133. Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx xxx xxx (o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities, and local government units." In the above cases, the Supreme Court sustained the claim of a government instrumentality for exemption from real property tax by virtue of the express provisions of Sections 234 (a) and 133 (o) of the LGC. Regrettably, there is no such like provision in RA 7227 or RA 9400 expressly granting SBMA exemption from the payment of national taxes. Furthermore, while Section 32 (B) (7) (b) of the 1997 Tax Code, as amended, excludes from gross income and exempts from taxation the income derived by the government or its political subdivision from any public utility or from the exercise of any essential governmental functions accruing to the Government of the Philippines or to any political subdivisions thereof, the said provision does not apply to SBMA. In BIR Ruling No. 038-2002 dated November 5, 2002, this Office had ruled that Section 32 (B) (7) (b) of the 1997 Tax Code does not apply to a government instrumentality, viz. : An "instrumentality" refers to "any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned and controlled corporations. . . . The exception provided under Section 32(B)(7)(b) of the Tax Code of 1997 where income derived from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof, shall be excluded from gross income subject to income tax, is not applicable to DFP. If Section 32(B)(7)(b) intended to extend the exception to the agencies and instrumentalities of the National Government, then it should have restated the wording of the law to include the same. And yet, the legislature used the phrase "Government of the Philippines" in Section 32(B)(7)(b) while Section 27(C) expressly mentioned "instrumentalities." Nothing can actually prevent Congress from decreeing that even instrumentalities or agencies of the Government performing governmental functions may be subject to tax. Where it is done precisely to fulfil a constitutional mandate and national policy, no one can doubt its wisdom. Based on the foregoing, SBMA's request for tax exemption cannot be granted for lack of legal basis. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue